Challenges Ahead: Restoring Confidence in China’s Economy and Private Sector

China is facing a critical moment as its economy stalls and confidence in the government’s ability to fix deep-rooted problems wanes. President Xi Jinping’s focus on state enterprises and increased control over the private sector has created a sense of hostility towards private enterprise. The government’s apparent hostility towards foreign businesses and its unwillingness to modify its “zero Covid” policy have further eroded confidence. The private sector is crucial for the country’s economic growth, innovation, and job creation, and without a strong relationship with the private sector, China’s plans for a high-tech economy are unrealistic.

The government’s centralized policymaking under President Xi has also contributed to the loss of confidence. Policy changes in the property sector, for example, were introduced abruptly, leaving businesses little time to adjust. This lack of transparency and sudden shifts in policy undermine confidence in the government’s decision-making process. The government’s response to rising youth unemployment by scrubbing the release of data and pushing back against talk of deflation further adds to concerns. The central bank’s recent interest rate cuts may not be enough to boost confidence and spending if households and businesses remain anxious about the future.

To restore confidence, the Chinese government needs to recognize the importance of the private sector and take concrete measures to support it. This includes financial-sector liberalization to direct more resources to private businesses, transparency in information and policymaking, and measures to boost household consumption. President Xi must understand that private-sector confidence cannot be controlled through command and control systems, but rather through a cooperative and supportive approach. The private sector is crucial for achieving his visions for the Chinese economy.

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Eswar Prasad is a professor in the Dyson School at Cornell University, a senior fellow at the Brookings Institution and the author of “The Future of Money.”

Source photograph by Phill Magakoe/Agence France-Presse — Getty Images.

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